Wednesday May 4, 2005 - 10:52:14 GMT
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INVESTICA Ltd - www.investica.co.uk
China speculation will continue
The less aggressive Fed statement will lessen the potential for dollar buying on yield grounds even though there will still be a comfortable yield advantage for the US currency. Regional considerations will remain an extremely important factor and there will be further speculation over a Chinese yuan policy change within the next few days. In this environment, there will be great caution over selling the yen and there is a greater risk of sharp dollar losses than big dollar gains in the short term as any Chinese policy shift could push the yen to at least 102.5. In this environment, the dollar is also likely to hit selling pressure on rallies back towards the 105.5.
The yen was trapped within narrow ranges ahead of the FOMC meeting, but the US currency lost support at the 105.0 level in Asia on Wednesday and dipped to a low of 104.5. A general Euro recovery prevented the Japanese currency from making gains against the Euro. Japanese markets will again be closed on Thursday.
Finance Minister Tanigaki expressed confidence over the domestic economy, although he was also concerned over the deflation risks within the economy and the overall impact should be broadly neutral for the Japanese currency.
The yuan forward premium widened to the highest level since October 2003 on Tuesday and the speculation over a yuan revaluation will continue over the next few days at least given that Chinese markets will not re-open until next Monday. The speculation over a Chinese policy change will continue to discourage yen selling in the short term.
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